Federal Budget Newsletter

Federal Budget Update June 6, 2011

The March 22, 2011 Federal Budget did not pass before Parliament was dissolved. The subsequent election resulted in a Conservative majority government and Finance Minister Jim Flaherty has been given a fresh opportunity to reintroduce his proposals in a new Budget presented on June 6, 2011. All of the income tax changes (including implementation dates) introduced in the March Budget have been carried forward, as originally proposed, to the June Budget. The June Budget did not introduce any new income tax proposals.

Because of the Conservative majority, this June Budget is expected to pass quickly.

Fiscal policy initiatives and tax changes are reviewed in our Federal Budget Newsletter 2011.

You can access our 2011 Federal Budget Newsletter by clicking on this link.

The June Budget has proposed the following non-income tax changes:

  • As promised during the election campaign, the $2 per vote quarterly allowance for political parties will be phased out.
  • Provision has been made in 2011-12 for $2.2 billion to compensate Quebec in implementing its HST, provided that a satisfactory agreement can be reached. This compensation is consistent with agreements made between the Federal Government and other Provincial Governments that have agreed to a harmonized sales tax structure.

From an economic viewpoint, the June Budget papers highlighted the expected continued improvement in the Canadian economy and indicated that the Government remains committed to balancing the Budget by 2014-15, one year earlier than previously anticipated.

Tax Changes

As noted above, all of the income tax changes (including implementation dates) introduced in the March Budget have been carried forward, as originally proposed, to the June Budget. The June Budget did not introduce any new income tax proposals.

We strongly encourage you to review our March 22, 2011 Newsletter to see how you might be impacted by the proposed tax changes. (See the link above.) To assist you in focusing on the changes you are most interested in, we have highlighted the Budget’s most significant tax proposals in the following brief summary. The summary groups the changes targeted at:

  • Businesses and corporations
  • Charities, qualified donees and donations
  • Individuals
  • Registered plans.

Significant tax changes affecting businesses and corporations include:

  • Extension of existing anti-deferral rules applying to partnership income to require corporations to include partnership income up to the end of the corporation’s fiscal period regardless of the partnership’s year-end. The partnership rule changes appear to be the most onerous and complicated of the Budget proposals. Refer to the discussion in our March 22, 2011 Newsletter.
  • Extension of the availability of the accelerated capital cost allowance (CCA) on manufacturing and processing equipment for an additional two years to cover equipment acquired before 2014.
  • Expansion of the definition of eligible clean energy generation and conservation equipment included in CCA Class 43.2.
  • Extension of the availability of the mineral exploration tax credit to flow-through share agreements entered into on or before March 31, 2012. Under the existing “look-back” rule, funds raised with the credit in the first three months of 2012 can be spent on eligible exploration until the end of 2013.
  • Extension of the Qualifying Environmental Trust (QET) rules that apply to the pre-funding of regulatory requirements in respect of mines, quarries and waste disposal sites to include the pre-funding of reclamation costs for pipeline abandonment. Other QET rules changes affect qualified investments and tax rates.
  • Extension of the application of the “stop-loss” rules that reduce a corporation’s capital loss in certain situations when it redeems a share and realizes a capital loss and is deemed to have received a dividend. The stop-loss rules will be extended to apply in situations where any dividend is received on the redemption of shares held by a corporation other than where the dividend is received on the redemption of shares of the capital stock of a private corporation that are held by a private corporation (other than a financial institution).
  • Announcement of a review of the Employee Profit Sharing Plan rules to consider possible changes to restrict perceived abuses relating to the avoidance of Canada Pension Plan and Employment Insurance contributions and income tax withholdings.
  • Simplification of the Customs Tariff and lower tariff rates for low value imports.

Significant changes have been made to tighten the rules governing charities, qualified donees and donations:

  • Donations of publicly listed flow-through shares will be adversely impacted as a result of a significant restriction to the donor’s ability to exclude the capital gain otherwise realized on the donated share.
  • Restrictions on receipts issued for the granting of options to qualified donees.
  • Restrictions on charitable donation claims for gifts of non-qualifying securities.
  • Revised receipts and tax reassessments resulting from returned gifts.
  • Increased powers for the Canada Revenue Agency to intervene in the governance of qualified donees.

Significant personal tax changes include:

  • Introduction of a new children’s arts non-refundable tax credit of 15% on up to $500 of eligible artistic, cultural, recreational or development expenses per child.
  • Introduction of a new volunteer firefighters non-refundable tax credit of 15% on a flat amount of $3,000 ($450 credit) for individuals who perform at least 200 hours of volunteer firefighting services in a taxation year.
  • Introduction of a new family caregiver tax credit of 15% on a flat amount of $2,000 to assist caregivers of dependants with a mental or physical infirmity including spouses, common-law partners and minor children that will be added to one of the existing dependency-related credits, i.e., spousal or common-law partner credit, child tax credit, eligible dependant credit, caregiver credit or infirm dependant credit.
  • Enhancement to the medical expense tax credit to remove the $10,000 maximum claim where the caregiver pays the medical or disability-related expenses of a dependant (including children aged 18 or older, parents, grandparents, grandchildren, siblings, aunts, uncles, nieces or nephews).
  • Expansion of the eligibility for a child tax credit where two families live in the same house.
  • Extension of the tuition tax credit to include certain examination fees to obtain a professional status or to be licensed or certified to practice a profession or trade in Canada.
  • Extension of benefits available to a Canadian student at a university outside Canada relative to the tuition tax credit, education tax credit and textbook tax credit measures, and eligibility for educational assistance payments from a Registered Education Savings Plan by extending eligibility to courses with a minimum duration of three consecutive weeks (from 13 weeks currently).
  • Increased flexibility for Registered Education Savings Plans to allow for transfers between individual RESPs for siblings without tax penalties and repayment of Canada Education Savings Grants.
  • Exemption for certain individuals with a shortened life expectancy from the 10 year repayment requirements for certain grants and bonds under the Registered Disability Savings Plan rules.
  • Expansion of the high rate “kiddie tax” to apply to capital gains realized by a minor from the disposition of shares of a corporation to a person who does not deal at arm’s length with the minor, if taxable dividends on the shares would have been subject to the kiddie tax. The capital gain is deemed to be a taxable dividend to the minor child and taxed at top personal rates. The corporation is not considered to have paid a dividend.

Significant changes to the rules governing registered plans include:

  • Extension of various anti-avoidance rules that apply to Tax-Free Savings Accounts to Registered Retirement Savings Plans. The proposals are discussed in our Newsletter.
  • Two new measures with respect to Individual Pension Plans, a type of Registered Pension Plan, that will require:
    • Annual minimum withdrawals once a plan member reaches age 72, parallel to the rule for Registered Retirement Income Funds; and
    • Funding for past service pension contributions to come from the individual’s existing RRSP assets or accumulated RRSP contribution room before new deductible contributions for past service may be made.

There are also Budget proposals relating to the Canada Child Tax Benefit, a non-taxable amount paid monthly to assist eligible families with the cost of raising children under the age of 18, relative to notifications of changes in marital status and increase to advance payment.

Read Smythe Ratcliffe’s Federal Budget Newsletter available in PDF format below.

2011 Federal Budget Newsletter